Swiss-European carbon market link: An omen for future ties?

After six years of negotiations, the European Union and Switzerland have signed an agreement to link their carbon markets. This means that Swiss industries will be able to use European emission allowances and vice versa. The deal is significant in its symbolic nature as it is the first time that two Parties to the Paris Agreement have linked their cap and trade schemes, but it also illustrates how hard such negotiations are and will be in the future.

The Swiss ETS covers 55 installations which together are responsible for 11% of the country’s CO2 emissions. As a comparison in terms of emissions, the EU ETS is over 370 times bigger than Switzerland’s system. The economic significance and effect on EU ETS prices will therefore be indiscernible.

Transparency concerns

The EU ETS covers large emitters in the European Economic Area, including EU countries and non-members Norway, Iceland and Liechtenstein.

This is the first time that the EU ETS will be linked with an outside carbon market, setting a precedent for future linking agreements. However, lessons must be learned from the significant shortcomings in the negotiating process: the Commission failed to make its negotiating mandate public and the talks were held in secret with no opportunity for public scrutiny and input.

Despite an explicit request by Carbon Market Watch, civil society organisations were denied access to the negotiation documents, and even the European Parliament was not allowed to scrutinise them.

Environmental risks

Although championed by the Commission, ETS linkages carry significant risks, which is why it is important that information on negotiation terms is public, in order to allow oversight and civil society input. The potential benefits from linking ETSs are mostly economic rather than environmental. The risks, however, are largely climate-related, as linking can:

lower prices in the market with a relatively tighter cap leading to carbon lock in and stranded assets undermining medium term economic efficiency

lower overall abatement by opening a flow of ‘hot air’ permits from one market to the other

create a perverse incentive for countries to reduce their climate targets in order to sell allowances to installations in the other jurisdiction

Overall, the link between the European and Swiss carbon markets is inconsequential in terms of emissions, but it is important that it does not start a historic trend of ambition-reducing linkages.

Future cooperation with large markets, such as with Korea, or China must be approached with more transparency, a call echoed by several MEPs. Transparency and public input will be crucial to ensure that supposed economic efficiency does not come at the price of watered down climate ambition.

One positive aspect of the deal is the increased scope of the Swiss ETS, which will be broadened to include the aviation sector. The future of this relationship is however put into question with the recent CORSIA international agreement to offset international aviation emissions. Whether other effects of the link increase or undermine this positive impact will show once allowances start flowing between both countries, which is scheduled to start in 2020.